vrijdag 6 april 2012

Another Correlation: Interest Rates and P/E Ratios of Gold Mines

In the Peter Schiff Show on the 5th of April, Peter talked about how low the P/E ratios of the gold mines are, compared to the interest rate. He said: "the lower the interest rates are, the higher P/E ratios will be".

This correlation is intuitively correct. As the interest rate is low, you won't get any return by putting your money in treasuries or in the bank. So where do you put your money, if not in cash and bonds? You will put your money in the stock market where you get a higher return. That's why stocks will have a higher valuation and consequently a higher price. A higher price will result in a higher P/E ratio. Conversely, when interest rates are high, the P/E ratio will be low.

For example: if the interest rate were 15% like in year 1981, investors will likely put their money in bonds with a 15% return per annum, rather than putting their money in risky stocks.

To show this correlation I will give historical evidence and show why Gold Miners are very cheap.
Go here to check out my analysis.

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